ENTREPRENEURSHIP

DEVELOPMENT
UNIT-4
SYLLABUS

Forms of Ownership Sole Proprietorship;

Joint Stock Company; Public Company;
Private Company; Partnership Firm; Hindu
Undivided Family.
SOLE PROPRIETORSHIP

A sole proprietorship is owned and operated by

one individual. The owner of a sole
proprietorship doesn't need the approval of a
board or partner to make daily business
decisions. They also get to keep and determine
what to do with the business' profits.
A form of business organization in which the
business is owned, managed, and controlled by
an individual is known as a sole proprietorship.
This individual is the recipient of every profit
and loss of the business and bears every risk
coming to the business. Here, the word sole
means only and proprietor means owner;
hence, the only owner of the business.
Usually, businesses with personalized services like
hair salons, beauty parlours, retail shops, etc., run
under sole proprietorship. In this form of business,
the owner is not separate from the business; hence,
no separate legal entity. Besides, the owner does
not have to perform any legal formality and can
start the business whenever they want.
1)FORMATION AND CLOSURE
This type of business organization is formed by the owner
himself.

● No legal conventions are obliged to start the sole

proprietorship form of organization.
● In some instances, the legal formalities are required or the
owner should have a particular license or a certificate to
run the business.
● The owner can close the business at his own discretion.
● Example: Goldsmith or a person running a medical shop should
have a license to run this type of business.
2)LIABILITY
In the sole proprietorship business, the sole owner has
unlimited liability.

● In this case, the owner is himself liable to pay all the

liabilities. If he takes a loan for its business then he will be
liable for all the debts.
● Hence, he is personally liable for all the debt which can be
recovered by his personal estate when funds are
insufficient.
● Example: A loan taken by the owner of the sweet shop is solely
responsible for the repayment of the loan to the bank.
3)SOLE RISK BEARER AND PROFIT
RECIPIENT
● A sole proprietor is only the one who bears all
risks which are related to its business.
● All the profits or losses which are earned from the
business are to be enjoyed by the sole owner.
4)CONTROL
● As all the rights and responsibilities lie with the sole
proprietor that is why he controls all the business
activities.
● No one can interfere in the business activities of a
sole proprietor.
● Hence, only the sole proprietor can modify his plans
accordingly.
5)NO SEPARATE ENTITY

● According to the accounting system, the owner and the

business are considered as two separate entities.
● But the law does not make any distinction between the
sole trader and its business.
● Hence, without the sole trader, the business has no
identity because he is the only person who performs all
the business activities.
6)LACK OF BUSINESS CONTINUITY
● Death, imprisonment, physical ailment, insanity or
bankruptcy of the sole proprietor will directly affect the
business or it may cause shutting down of the business.
● In the case of the beneficiary, successor or legal heir of
sole proprietor, he can run the business on behalf of the
proprietor.
ADVANTAGES
● Quick decision making– A sole proprietor has the freedom to
make any decision. Therefore, the decision would be prompt as
they don’t have to take the permission of others.
● Confidentiality of information- Being only the owner of the
business, it allows him/her to keep all the business information to
be private and confidential.
● Direct incentive- A sole proprietor directly has the right to have all
the profit or benefits of a company.
● Sense of accomplishment- He/she can have the personal
satisfaction associated with working without any guidance or
alone.
● Ease of formation and closure- A single proprietor can enter the
business with minimum legal formalities.
DISADVANTAGES
(1)Limited Resources
● Resources of a sole proprietor are limited to his savings and borrowings
from the relatives.
● Banks also hesitate or deny giving the long term loans or extend the
limit of long term loans due to the weak financial position of the
business.
● Lack of all these resources results in hindrance in the growth of the sole
proprietorship business
● Above mentioned are the reason why the business generally remains
small.

(2) Life of a Business Concern

● The owner and its business is the same entity and due to lack of
successor or heir, the life of the business is limited.
● Due to death, insolvency, illness of a proprietor gives a detrimental
impact on the business which results in closure of the business.
(3) Unlimited Liability
● The major demerit of a sole proprietorship is that the owner has
unlimited liability.
● If the sole owner becomes fails to pay the debts, due to the failure of a
business, the creditors would not only claim from business assets but
also from his personal estate.
● Taking a large amount of loan is too risky and also put the burden on the
sole owner of the business.
● Hence, this is the reason why sole traders do not intend to take the risk
for the survival and growth of the business.

(4) Limited Managerial Ability

● The sole proprietor has to accept all the responsibilities to carry out its
business.
● Sometimes the proprietor has to perform all the managerial functions
like sales, purchase, marketing, selling, dealings with clients, etc.
● He may not be able to employ and retain aspiring employees.
HINDU UNDIVIDED FAMILY
BUSINESS
A form of business organization found only in India in which
the business is owned and carried on by the HUF(Hindu
Undivided Family) members is known as Joint Hindu Family
Business. It is one of the oldest forms of business
organization in India. This form is governed by the ‘Hindu
Law’. The eldest member and head of the family, also known
as “Karta,” controls the business.
Membership in this form of business organization is based
on the birth in a specific family. The three successive
members of the family can be the members of the business.
Every member of the business have equal right and
ownership over their ancestor’s propertyand these
members are known as ‘co-parceners.’ The two conditions
for the existence of a Joint Hindu Family Business are: there
must be some ancestral property, and a minimum of two
male members must be in the family. Under section 2(31) of
the Income-tax Act, 1961, a HUF (Hindu Undivided Family) is
a family unit consisting of lineal descendants of a common
ancestor. It is a separate tax entity treated as a “person” and
can be formed by Hindu, Buddhist, Jain, and Sikh families.
A HUF includes
● Karta: The family head of HUF is known as the
“Karta.”
● Coparceners: Individuals within four generations of
the Karta who acquire an interest in the joint family
property by birth. They can demand a partition and an
inherent share in the joint family property.
● Members:Include all individuals who are part of the
family unit but do not have a coparcenary rights.
KARTA
A Karta is the manager and head of a Hindu
Undivided Family (HUF), responsible for
overseeing the family’s affairs and properties.As
the leader, they handle the family’s day-to-day
expenses, manage and protect joint family
assets, and make decisions on behalf of the
family.The Karta also represents the family in
business and legal matters, including managing
debts and liabilities, and distributing income
among family members.
Traditionally, the Karta is the eldest male in the
family, although recent legal changes allow
women to become Kartas in certain cases.They
hold significant authority, acting as the custodian
of family wealth and ensuring the welfare of all
members.
 TAXATION
A HUF is taxed at the same slab rates applicable to individual
taxpayers.

● Because HUF is treated as a distinct taxable entity, the basic tax

exemption of ₹2.5 lakh is available on the total taxable income.
This is over and above the income tax benefits you and your
family members already enjoy individually.
● Further, the income from the below sources is excluded from
HUF taxation.
○ Income from property transferred by a member to the HUF
without adequate consideration.
○ Income from a woman’s personal property ("stridhan").
○ Income from an impartible estate is taxable for the estate
holder, not the HUF.
●
● HUF can claim deductions under Sections 80C, 80D,
and other provisions of the Income Tax Act, just like an
individual taxpayer.
● Income from ancestral properties or businesses can be
taxed under the HUF to reduce the taxable income of
individual family members.
ADVANTAGES
1)Tax Benefits:

● An HUF is treated as a separate entity for tax purposes, which means

it can enjoy its own tax exemptions, deductions, and rebates. The
HUF can also be taxed independently from its members, allowing for
the possibility of splitting income and reducing overall tax liability.

2)Succession and Continuity:

● An HUF allows for the continuity of the family business or property

across generations. It is managed by the eldest male member (Karta),
and the structure remains intact even if the family members change
over time, ensuring smoother inheritance and succession.
3)Joint Ownership:

● All members of the HUF share ownership and rights over the assets,
property, and business, which allows for joint decision-making and
management. This can help in pooling resources for investments or
business ventures.

4)Separate Legal Entity:

● An HUF is considered a separate legal entity, meaning it can hold

assets and property in its name, enter into contracts, and conduct
business separately from its members.
5)No Restrictions on Number of Members:

● There is no upper limit to the number of members in an HUF. It

can include all members of a Hindu family, making it suitable for
large families who wish to maintain joint control over family
assets and businesses.

6)Protection from Creditors:

● The assets of an HUF are protected from personal creditors of

individual members, as long as the assets are part of the HUF.
This can be beneficial in case any member faces financial trouble.
DISADVANTAGES
1)Limited Control by Karta:

● While the Karta has significant control over the management of

the HUF, this can sometimes lead to centralized
decision-making. The other members may not have equal
control, which can cause disputes or dissatisfaction.

2)Complexity in Division:

● If the family decides to divide the HUF, it can lead to complicated

legal and financial issues, especially when dividing the assets and
properties among members. The process can be time-consuming
and involve family disputes.
3)Unlimited Liability:

● The Karta has unlimited liability for the debts and liabilities of the
HUF, meaning that personal assets of the Karta can be used to settle
any HUF-related debts. This creates a financial risk for the Karta.

4)Hindu Male Members Only (in some contexts):

● Traditionally, only Hindu male members could be part of the HUF,

though the Hindu Succession (Amendment) Act 2005 gave daughters
the same rights as sons. However, the management is still often
dominated by the eldest male member. This may lead to challenges in
terms of equal rights, especially for female family members in some
HUFs.
5)Disputes Among Family Members:

● Since all family members have a stake in the HUF, disputes

regarding the division of assets or control of business
decisions can arise. Family disagreements can affect the
smooth operation of the HUF and result in legal battles.

6)Not Suitable for Non-Hindu Families:

● The concept of an HUF is specific to Hindu law and doesn't

apply to non-Hindu families. Other religious communities
(Muslims, Christians, etc.) cannot form an HUF.
7)Limited Flexibility:

● There can be limited flexibility in decision-making due to the

requirement for consensus among the family members. This can
slow down business operations or hinder the adoption of new
strategies.

8)Taxation Complexity:

● While HUFs enjoy certain tax benefits, maintaining compliance

with tax regulations can be complex, particularly if there are
changes in the family structure or business operations.
PARTNERSHIP
The most crucial disadvantage of a sole proprietorship
is the lack of enough financing in the business, which is
resolved in this form of business organization.
According to the Indian Partnership Act, 1932, a
partnership is a form of business organization in which
there is a relation between two or more people with
an agreement to share the firm’s profits carried on by
every partner or any one of the partners acting for all.
It solves the need to acquire greater capital investment,
risk-sharing, and a variety of skills in the business, which
is not available in Sole Proprietorship and Joint Hindu
Family Business. The minimum number of partners
required in a partnership firm is two. There are different
types of partners and partnerships in this form of
business organization.
1)FORMATION OF PARTNERSHIP
A partnership is an alliance of two or more people created
by an agreement or contract. The agreement (accord) is the
basis for the partnership between the parties. This type of
agreement is in writing. An oral agreement is legally binding.
To minimise misunderstandings, it is always preferable if the
partners have a copy of the written agreement. The
agreement should be to conduct some business. The mere
co-ownership of a property does not establish a partnership.
For Example, if two persons jointly purchase a plot of land,
they become the joint owners of the property and not the
partners. But if they are in a business of sale and purchase of
property for the purpose of profit, then they will be called
partners.
The agreement that has been made between partners must
be to share all the profits and losses of a business equally or
as per the agreement. If some persons join hands for the
purpose of some charitable activity, it will not be termed a
partnership.
2)NUMBER OF PARTNERS FOR
THE FIRM
A partnership must be manifested by at least two people
who share a relatively similar purpose. In other words, the
minimum number of partners in a business might be two.
However, there is a limitation to the number of people they
can accommodate. But in the case of banking, the number of
members should not exceed ten, and in the case of other
businesses, the number should not exceed twenty. If the
number of members exceeds this limitation, the firm cannot
be classified as a partnership firm.
3)LIABILITY
In general partnerships, all partners are personally held
accountable. It means that they are all collectively liable for
retrieving all of the firm’s debts, even if it means liquidating
their personal assets. Partners’ firm liability is unlimited like
that of a sole proprietor,
That seems to be if the firm’s assets are inadequate to pay
the obligations, the partners’ personal holdings, if any, can
also be used to meet the company liabilities.
4)RISK BEARING
The risks that come with operating a firm as a team are
shared by the partners. Profits are divided among the
partners in an agreed-upon ratio as the return. They
also share losses in the same ratio if the corporation
suffers losses
5)DECISION MAKING AND
CONTROL
Every partner has the right to participate in the
organization’s management and decision-making. The
partners share responsibility for decision-making and
control of day-to-day operations. Decisions are usually
made with mutual consent. As a result, the operations of
a partnership business are managed via the joint efforts
of all partners.
ADVANTAGES
1)Easy to Form:

● Partnerships are relatively simple to establish, requiring minimal

legal formalities compared to corporations.

2)Pooling of Resources:

● Partners can combine their financial, physical, and intellectual

resources, making it easier to fund business activities and grow the
firm.

3)Shared Responsibility:

● The workload and decision-making responsibilities are divided

among the partners, reducing the individual burden.
DISADVANTAGES
1)Lack of Continuity:

● Partnerships may be dissolved if a partner decides to leave,

retires, or passes away, leading to business instability unless
specific arrangements are made in the partnership agreement.

2)Shared Profits:

● All partners share profits according to their agreement, which

means that the earnings are split, potentially leading to
dissatisfaction if some feel they contribute more than others.
3)Limited Expertise in Specific Areas:

● Despite the pooling of skills, a partnership may still lack

expertise in certain areas (like marketing, legal matters, or
finance), which could affect the business' success.

4)Management Issues:

● If the partners have different management styles, this can

lead to inefficiencies and a lack of coordination, affecting the
business's performance.
JOINT
STOCK
COMPANY
JOINT STOCK COMPANY
A joint stock company is an organisation which is owned
jointly by all its shareholders. Here, all the stakeholders have a
specific portion of stock owned, usually displayed as a share.
Each joint stock company share is transferable, and if the
company is public, then its shares are marketed on registered
stock exchanges. Private joint stock company shares can be
transferred from one party to another party. However, the
transfer is limited by agreement and family members.
FEATURES
1. Separate Legal Entity – A joint stock company is an
individual legal entity, apart from the persons involved. It
can own assets ,can sue or can be sued. Whereas a
partnership or a sole proprietor, it has no such legal
existence apart from the person involved in it. So the
members of the joint stock company are not liable to the
company and are not dependent on each other for business
activities.
2.ARTIFICIAL LEGAL PERSON
A company is a legal entity that has been created by the
statues of law. Like a natural person, it can do certain things,
like own property in its name, enter into a contract, borrow
and lend money, sue or be sued, etc. It has also been granted
certain rights by the law which it enjoys through its board of
directions.

However, not all laws/rights/duties apply to a company. It

exists only in the law and not in any physical form. So we call
it an artificial legal person.
3.Perpetual Existence – Once a firm is born, it can only be
dissolved by the functioning of law. So, company life is not
affected even if its member keeps changing.

4.Number of Members – For a public limited company, there

can be an unlimited number of members but minimum being
seven. For a private limited company, only two members. In
general, a partnership firm cannot have more than 10
members in one business.
5.Transferable share – A company’s shareholder without
consulting can transfer his shares to others. Whereas, in a
partnership firm without any approval of other partners, a
partner cannot move his share.

6.Incorporation – For a firm to be accepted as an individual

legal entity, it has to be incorporated. So, it is compulsory to
register a firm under a joint stock company.
6.LIMITED LIABILITY
This is one of the major points of difference between a company
and a sole proprietorship and partnership . The liability of the
shareholders of a company is limited. The personal assets of a
member cannot be liquidated to repay the debts of a company.

A shareholders liability is limited to the amount of unpaid share

capital. If his shares are fully paid then he has no liability. The
amount of debt has no bearing on this. Only the companies
assets can be sold off to repay its own debt. The members
cannot be made to pay up.
ADVANTAGES
● A joint-stock company can access large amounts of
money via numerous shareholders that can be used to
build a business.
● Shareholders have a direct say in decisions relating to
the management of the company. They also have the
right to elect the board of directors.
● Shares of public companies can be bought and sold
freely on stock exchanges. Shares of private companies
may be traded as allowed or restricted by the company.
ADVANTAGES

● Today's joint-stock companies provide shareholders limited liability for

debts that a company incurs.
● New shares and debentures can be issued if the company requires
additional capital.
● For public companies, there is no ceiling that limits the number of
shareholders (a private company may set such limits).
● Investment risk is diversified among many shareholders, not borne by one
or two individuals.
● Public joint-stock companies support good corporate governance and
make their externally audited financial statements available for public
scrutiny.
PRIVATE COMPANY
This is a type of company that finds mention in the Companies Act,
2013. The purpose of private companies is when the business is not
very large, but the owners/management still want to opt for a
company over a partnership or proprietorship. Let us look at some
of the features/characteristics of a private company.

● Minimum numbers of members required to incorporate a

private company are 2. There is also a maximum limit of 200
members. However, joint members of shares are counted as
one member.
● The minimum paid-up capital for a private company has been
kept at one lacs. There is no maximum limit in this case.
● Transferability of shares by its members is restricted.
Such transfers are not absolutely prohibited, but there
are certain restrictions put by the Companies Act. This
is to avoid takeovers by larger companies and
multinationals and ensure the sanctity of private
companies
● Private Companies under no circumstances can accept
deposits from the public. It cannot invite members of
the public to subscribe to its shares either.
● The number minimum of directors to be appointed are
2. No independent directors are required.
PUBLIC COMPANY
In simple terms, a public company is a company whose shares
can be subscribed by members of the public. As per the
Companies Act, 2013 a public company is

● A company that is not a private company

● Has a minimum of seven members, no maximum limit is
mentioned
● Has a minimum paid-up capital of five lacs, again there
is no maximum limit
● A private company that is a subsidiary of a public
company, will be considered a public company
There are certain documents required to be filled by a public
company with the Registrar of companies, so let us take a look at
these documents

● Memorandum of Association: This is the constitution of a

company. States the objective of the company, the total
capital, the name of the company, the registered address
etc.
● Articles of Association: This document contains rules and
regulations of the internal management of the company.
● Prospectus: Because the company wishes to invite funds
from the public it must register and issue a prospectus or a
document in liu of a prospectus. Any material
misstatement in the prospectus by the directors,
promoter, or the experts is a criminal liability.
Point Private Company Public Company

Paid-up Capital Minimum paid-up capital of Rs 1.00.000/- Minimum paid-up capital of Rs 500.000/-

No. of Members Minimum 2 members and maximum 200 Minimum 7 members, no max limit

Name of Company Name must end in “private limited” Name must end in “public limited”

Minimum two directors, and no need for Minimum 3 directors, and if listed
No. of Directors
independent directors company one-third must be independent

Managerial Restricted to 11% of the Net profit of the

There are no restrictions
Remuneration company
Quorum of Minimum two members, present in Quorum will depend on the total
Meetings person number of members of the company

Private companies cannot have public Public offers must be in the demat
Public offer
offers for shares form only

If paid capital exceeds 100 crores, or

Accepting
Not allowed according to the act turnover exceeds 500 crores, the
Deposits
company can accept public deposits